The risk that arises from a significant drop in the market capitalization of an exchange to the effect that large numbers of investors try to exit the market at the same time, thus in the process incurring massive losses in market value. Market crashes have been a phenomenon associated with financial markets since their very inception. Notable examples of recent crashes include the crash of October 19, 1987 (the market lost 22.6% of its value in one day), the Asian crash 1989-2003 (the market dropped by 63% over the period), and the Dot-Com crash over the period of March 11, 2000 and October 9, 2001(NASDAQ dropped by almost 78%).

Other forms of crash could include the events of drawdown (withdrawals by shareholders and investors). This risk can be hedged using financial contracts such as options. For example, put options (particularly deep out of the money contracts) may be used to place a floor on the value of equity holdings (however, this cover may not be comprehensive, especially in situations where the market advances then falls back to initial level). A yet theoretical type of options, dubbed the “crash option”, can just perform a comprehensive insurance task during the lifetime of the contract. A crash option resets its holder to the historical maximum level of the underlying price during its life. If the crash event doesn’t occur up to expiration date, the option expires worthless.